New York Weighs Tax Increase on Business Owners

As Joe the Plumber's star fades, the war over taxes continues to be waged from sea to shining sea. Legislators in many states are debating tax cuts and increases—and small business is caught in the middle of the debate. New York State is one flashpoint in the struggle.

New York State faces a yawning $14 billion projected deficit for the coming year. Democratic lawmakers in the assembly and senate propose raising personal income tax rates for those making above $250,000 a year, and the Business Council of New York State (BCNYS) is raising an alarm on behalf of small business.

"They call it the millionaires' tax," said Ken Pokalsky, senior director of government affairs for BCNYS. "It also affects businesses filing as Subchapter S's. That fact resonated a bit with the legislature in the budget hearings."

Subchapter S or S corporation is a type of tax filing that exempts the company from paying income taxes, instead passing the burden on to shareholders.

The BCNYS opposed the legislation, claiming in a legislative memorandum that 200,000 small businesses could be impacted. The figure of 200,000 small businesses was trumpeted in an Albany Business Review story titled "Personal income tax hike could impact 200k businesses."

In fact, the number is much higher.

The 200,000 figure was an off-the-cuff estimate by state tax commissioner Robert Megna while testifying before the state legislature, according to Susan Burns, assistant director of public information for the Department of Taxation and Finance.

"It was just a number that he seemed to recall at the time off the top of his head," Burns said. She said that the most recent number available, collected in 2005, is 356,000 subchapter S filers. Burns estimated that between 80 and 90 percent of filers are small businesses.

But the number of small businesses impacted by the proposed tax wouldn't be 80 to 90 percent of 356,000, either. One more factor must be considered first—the Joe-the-Plumber factor.

"Most small business owners, like Joe, also have very modest incomes," wrote Len Burman, director of the Tax Policy Center. "The vast majority of small businesses would not be affected."

The Tax Policy Center, a joint venture between the Urban Institute and the Brookings Institution, studied the issue during the presidential campaign. They found that only about 3 percent of taxpayers who are likely filing returns for small businesses make over $250,000 a year.

In New York, Democrat Senator Eric T. Schneiderman, who proposed the bill in the Senate, argued that reducing state services like roads and police would also be bad for small business.

"The fact is you have a $14 billion deficit—we have to do something," Schneiderman said. "Lots of cuts will hurt businesses."

In any case, the proposed tax is not a shoe-in. The assembly did vote twice in the last year to raise taxes on the $1 million plus bracket, according to Dan Weiler, spokesman for State Assembly Speaker Sheldon Silver. But during the current tax spat, Weiler said, the Speaker remains uncommitted.